Regulations on Financial Institutions (Term Paper Sample)

Regulations on Financial Institutions
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Table of Contents TOC \o "1-3" \h \z \u Introduction PAGEREF _Toc97579356 \h 3Reasons why banks are regulated PAGEREF _Toc97579357 \h 4The underlying rationale for regulating banks PAGEREF _Toc97579358 \h 5History of bank failures in the United State PAGEREF _Toc97579359 \h 6Plan to reduce bank failures PAGEREF _Toc97579360 \h 9Bank regulators are so concerned about capital adequacy PAGEREF _Toc97579361 \h 10The responsibilities of the various bank regulatory agencies PAGEREF _Toc97579362 \h 12The US banking regulation compared to the European community PAGEREF _Toc97579363 \h 13Conclusion PAGEREF _Toc97579364 \h 15References PAGEREF _Toc97579365 \h 17
Introduction
 Regulations are important to protect the investors/savers from any malpractices and fraud that may take place within the institutions. To make sure they work in the interest of the society and the economic development of the country and the nation. To ensure stability, safety from the market disparities. To have easy redressed norms in case of any grievances of the investors and customers (Allen & Douglas, 2004). To have uniform rules and practices across all institutions. Regulations are important for maintaining stability in finances and efficiency in market performance, Promoting fair and healthy competition among market players, Preventing consumers against faulty market practices, Providing firms equal opportunities to set product prices and enhance their market performance (Barth, Brumbaug, & Wilcox, 2000). Provision of symmetric market information to avoid market distortive policies and prices by firms and helping consumers as it leads to the lessening of market risks caused by market intermediaries. The banking industry is the highest risk facing business in the world because of asymmetric information that banks have about the customer which further causes moral hazard and adverse selection problems (DeYoung, Hunte, & Udell, 2004). Initially, the bank did not use to recognize the risks associated with its assets on the pretext that it would lead to a bad balance sheet.
But lately, it was realized that the banks need to account for various risks including credit risk, market risk, interest rate risk, earning risk to name a few. But the credit risk is the highest. So now banks of all countries are required to follow Basel norms as set by the Basel Committee from time to time. All the measures are risk-adjusted. The importance of adjusting risk for measuring and regulating the performance of banks is that it ensures that enough capital is available with the banks every time so that there is no risk of any crisis as it has a direct impact on the economy of any country. It will also help the Central banks to regulate the banks so that they give the loans with due care and diligence. The performance measured after accounting for risk will be a true one and will fair picture of the functioning of banks which are a major pillar of our economy.
Reasons why banks are regulated
Bank regulation is the type of the administrative regulation which requires the banks to specific compliance and necessities, strategies and rules, and is to keep up reasonable working and transparency in the market between the financial organizations and the people and the huge partnerships with whom they lead organizations (Calomiris & Joseph, 2003). Another significant rationale for the regulation of banks is to address the risks of the security of the public supports included, the capital standards guarantee that the banks don't become an excessive amount of uncovered. The administration remains in trustee connection with the country and the residents henceforth it has a formal obligation to ensure its shoppers over the ventures, subsequently to elevate reasonable admittance to credit the regulation and management of banks is compulsory for each economy (Bouheni, 2014). If the bank regulations are not there, the scenario of the whole economy will be different than the main factor is losing the stability in the economy, financial frauds are increasing day by day and the liquidity and safety of the banking system is also affected and the payment system also effected not only these but also the number of adverse situations have arisen because lack of regulations, so for the proper economy and for economic stability regulations are most important (Calomiris & Joseph, 2003).
The underlying rationale for regulating banks
Banks in nations around the globe contribute tremendously to the financial development and advancement. They do as such by adding to a nation's installments instrument and credit framework. Hence banks are among the most regulated in nations wherever including the United States. Yet, the US subprime contract market emergency and the related credit crunch that developed in 2007 demonstrated more the need to change the current banking administrative framework. Bank regulation is concerned essentially with guaranteeing that banks are monetarily solid and very much oversaw (Calomiris & Joseph, 2003). In the United States, this idea is alluded to as security and sufficiency guidelines and in the greater part of the remainder of the world as prudential regulation. Banks are additionally dependent upon numerous different types of the guideline, including purchaser and speculator insurance necessities (Calomiris, 2007).
Capital regulations: Earlier Banks rely mostly on equity for their capital requirements, this trend gradually changes, now banks mostly, for their funding requirements relying on public deposits. Gradually bank's equity being reduced During the financial crisis, Banks may become insolvent as the equity or capital is very less, hence it requires capital regulations that regulate banks equity that should be maintained at a minimal level (Calomiris & Joseph, 2003). The bank regulation that helps to reduce the adverse selection problem is chartering banks. Because it screens proposals for new banks to prevent risk-prone entrepreneurs and crooks from controlling them. This regulation does not always work because risk-prone entrepreneurs and crooks have tendencies to hide their true nature and so sleep through the chartering process.
Capital regulations are regulations relating to Capital maintenance by a financial institution. These are also known as capital requirements which is the amount of capital a bank or any other financial institution has to hold. This is usually expressed as the Capital adequacy ratio of equity that must be held as a percentage of risk-weighted assets (Calomiris & Joseph, 2003). These regulations are to be followed to ensure that these financial institutions should not take on excess leverage and become insolvent. These capital requirements or guidelines are used to calculate capital ratios and then are used to evaluate and compare lending institutions based on their relative safety. These capital requirements or capital adequacy ratio that is used to determine the adequacy of capital keeping in view the risk exposure of bans. The capital adequacy ratio is calculated as per the